Managers of a security firm that won large contracts in Iraq warned their bosses in February of what they called a pattern of fraudulent billing practices, internal company memorandums suggest.
The memorandums, written primarily by two company managers, charged that the security firm, Custer Battles, repeatedly billed the occupation authorities for nonexistent services or at grossly inflated prices.
The company, which quickly grew to garner security contracts worth $100 million in little more than a year, denies the charges. It argues that the managers confused sincere attempts to document jobs done in a hurry, in a war zone, with deliberate deception and that the company provided all contracted services for the agreed-upon price.
The memos and a lawsuit filed by former employees cite several specific instances, including billing the Coalition Provisional Authority $157,000 for a helicopter pad that in fact cost $95,000, and repainting forklifts abandoned by Baghdad Airways and then charging the authority thousands of dollars a month, claiming that the forklifts were leased.
One of the managers was later fired by the company and is part of a lawsuit charging Custer Battles with defrauding the federal government of tens of millions of dollars. The other manager, who has since been appointed to a high-level position with the company, recently declared that after further research, he believed that any questionable practices were the fault of a few individuals and had not been condoned by the owners.
On Sept. 30, the Pentagon, concerned by the allegations raised by the employees, barred Custer Battles from receiving further military contracts, and it has withheld at least $10 million in payments to the company. The company is appealing the ban.
The charges swirling around Custer Battles in part reflect a problem that American government auditors have acknowledged: the inability of the Iraq occupation authority, particularly in its first year, to monitor properly the performance of hundreds of companies, large and small, that flocked to Baghdad seeking contracts for everything from building materials to armed guards.
The memorandums, provided by a lawyer for the managers who filed the lawsuit against Custer Battles, charge that the company submitted invoices from supposed subcontractors or suppliers that - unbeknownst to the American officials who paid the final tab - were virtual shells, newly created by Custer Battles executives and their partners.
Custer Battles, founded in 2001 by Scott Custer and Michael Battles, both in their 30's, says it has about 700 employees.
Pete Baldwin, then the Iraq facilities manager, wrote in a Feb. 2 memorandum that in one typical invoice, Custer Battles claimed that one of its shell companies had installed a helicopter pad for $157,000. In fact, Custer Battles had hired a different company to build the pad for $95,000, he asserted. He wrote that "every line item on that invoice," which was submitted for a total of $250,000, was just as "false, fabricated, inflated."
Mr. Baldwin wrote that he had repeatedly informed Mr. Custer, the company co-owner, of similar practices, but to no avail. A lawyer for Custer Battles, Richard Sauber, said that Mr. Custer had subsequently brought accountants to Iraq to clear up incomplete books but that they had not found fraud.
Mr. Baldwin said in the memorandum that after he began raising alarms, an executive with the company tried to fire him. Mr. Baldwin was given notice on Feb. 20 - he has said because of his charges of fraud. Larry Robbins, a lawyer for Custer Battles, says he was fired for "incompetence.''
Last week, documents unsealed by the Justice Department disclosed that two former managers of Custer Battles, including Mr. Baldwin, had brought a civil suit under the federal whistle-blower act charging the company with fraud.
The company called those charges baseless and the work of "a competitor and a disgruntled employee." The two former managers could win million of dollars in rewards if the charges hold up.
In a memorandum dated Feb. 28, 2004, Peter Miskovich, who was manager of the company's $21 million contract to safeguard Iraq's new currency as it was being distributed, gave a scathing review of the project, which he took over in midstream. Mr. Miskovich - who is not part of the whistle-blower lawsuit - wrote to his superior, Charles Baumann, then the country manager, that the records provided "prima facie evidence of a course of conduct consistent with criminal activity and intent."
Mr. Miskovich was later named director of the company's new Office of Corporate Integrity. In an Oct. 13 affidavit, he said that after further review, he had concluded that financial improprieties were more isolated than he had declared in February. He said that "I do not believe, based on what I learned during my tenure" as a project manager, "that Scott Custer or Mike Battles was involved in the questionable conduct."
Reached by telephone this week, Mr. Miskovich refused to speak to a reporter. Mr. Baldwin could not be reached for comment.
The Air Force, which suspended the Custer Battles contract, wrote a memorandum citing suspicion of repeated fraud. The Air Force quotes Mr. Miskovich's Feb. 28 memorandum, and calls the evidence of company misconduct "of so serious or compelling a nature that it affects their present responsibility to be government contractors or subcontractors."
In the case of the currency exchange project, said Mr. Sauber, the lawyer for Custer Battles, the occupation authority agreed on a final fee of $21 million, but the Pentagon has held up the final $10 million in payments while it investigates the contract.
Earlier this month, the Justice Department declined to prosecute Custer Battles, though the civil suit continues under the whistle-blower law. The department gave no public explanation, but officials had previously told lawyers in the lawsuit that because the alleged fraud was against the Coalition Provisional Authority, federal prosecutors did not have jurisdiction. Some experts have questioned that reasoning.
The company founders, Scott Custer and Michael Battles, are both Army veterans. Mr. Battles unsuccessfully ran for Congress in Rhode Island as a Republican two years ago.
The two started out by offering security services to nongovernmental organizations in Afghanistan after the fall of Kabul in late 2001.
But their business really took hold in June 2003, soon after the fall of Baghdad. The men obtained a $16.5 million contract from the occupation authorities to provide security for the Baghdad airport.
That one-year contract was not renewed, but the company had already begun pulling in others, directly with the Coalition Provisional Authority or as a subcontractor to other companies.
As it cut a quick and profitable swath, Custer Battles sometimes angered more experienced security companies with its aggressive recruitment of scarce security experts and claims to industry leadership. The company describes itself as "the premier security company in Iraq" on its corporate Web site.
The two founders have received praise for their entrepreneurship. The internal memorandums charge that part of that success, at least, was built on questionable practices.
One example captures some of the fog of post-invasion Iraq. With forged invoices, Mr. Miskovich wrote, Custer Battles billed for providing a security detail for the road delivery from Baghdad to Mosul of prefabricated cabins. The housing was urgently required by teams carrying out the currency exchange.
Not only did the company provide no guards for the trip, Mr. Miskovich said in his Feb. 28 memo, but the convoy was also somehow lost for a week, officials in Mosul had to sleep in tents, and the company had to offer a reward to locate the cabins.